The substitution effect is away from leisure As wages rise workers work more

The substitution effect is away from leisure as wages

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The substitution effect is away from leisure: As wages rise, workers work more But income rises with wages: with higher income, workers can afford more of everything
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The income effect is positive for leisure and negative for work: Workers buy more leisure & work less Typically, the income effect is weak compared to the substitution effect, so the supply curve slopes up De la Hoya made huge sums His substitution effect exceeded his income effect He fought more bouts His labor supply curve slopes up Joe Louis made much less Why did he fight less? Louis’s supply curve also sloped up But he had financial trouble His income was misappropriated He owed back taxes His wealth was very low He could afford less of everything, including leisure Less leisure means more labor His labor supply shifted right Slide 4 To analyze labor demand, we consider the following simple scenario for firms They produce a single output using two factors, capital ( K ) They operate in the short run (so capital is stable) They can adjust output ( Q ) only by altering the labor factor (L) We assume that all markets are perfectly competitive
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They have no effect on the market prices of their outputs.
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